A quota is a trade restriction imposed by the government that limits the amount or value of goods imported or exported into a country (Carbaugh, 2010, p. 151). An import quota affects the consumers, producers and the national welfare. Firstly, a quota reduces the supply of a commodity in the importing country’s domestic market. The reduction in supply causes an increase in market price thus leading to a decline in consumer surplus (Carbaugh, 2010, p. 151). However, the increase in market price benefits both foreign and domestic traders hence producer surplus increases (Carbaugh, 2010, p. 151). However, the overall effect is a reduction in national welfare as shown in the diagram below.
Price S
PQ
w x y z
PW
D
QS0 QD0 Quantity
In the above diagram, QS0 is the domestic demand while QD0 is the domestic demand. The difference between the two quantities is the amount the country imports. PW is the world price that is the price of the commodity under free trade. If the government imposes a quota, the price will rise to PQ. PQ is the price at which the import demand is equal to the value of the quota. Due to the increase in price, producer surplus will increase by area w as shown above. However, consumer surplus will decline by areas represented by w, x, y and z. Area y represents quota rent that is the profit a trader gets by buying commodities at the world price and reselling in the domestic market at the new quota price. The overall national welfare will decline. The effect of the quota on the importing country can be summarised in the table below.
As shown above, there will be a net decline in national welfare if a country imposes a quota. If the countries are small, there will be no effect on the free trade price. However, if the countries are large, an import quota will increase the supply of the commodity in the exporting country. This will cause a reduction in free trade price hence consumers in the exporting country will benefit. Thus, consumer surplus increases in the exporting country but declines in the importing country. Producer surplus increases in the importing country but falls in the exporting country. The overall effect is a reduction in world’s welfare.
Trade barriers on imports from countries with poor labour standards
Labour standards have an impact on the cost of production in a country. In countries where labour standards are poor, wages are low thus the cost of production is low. Such countries can produce and export goods at lower prices than countries where labour standards are high. Free trade between such countries has both positives and negatives in the importing country. Consumers in the importing country benefit from an increase in consumer surplus since goods will be selling at lower prices. However, producers in the importing country incur losses due to a reduction in demand for their commodities (Krugman, Obstfeld and Melitz, 2014). Producers are also forced to cut their prices to stay competitive in the market. This further causes adverse macroeconomic consequences such as an increase in unemployment in the importing country (Krugman, Obstfeld and Melitz, 2014). Furthermore, the real wage in the importing country may fall if there is a free trade but not the level of the poor country. Heckscher-Ohlin Model argues that free trade will cause factor price equalization such that the real wage will be above the autarky real wage in the poor country but less than the autarky real wage in the rich country (Appleyard and Field, 2014). Therefore, the rich country will lose if there is free trade between it and a country with poor labour standards. Therefore, there should be trade barriers on imports from such countries.
Bibliography
Appleyard, D. and Field, A. (2014). International economics. New York: McGraw-Hill Companies.
Carbaugh, R. (2010). Global economics. Mason, Ohio: South-Western.
Krugman, P., Obstfeld, M. and Melitz, M. (2014). International Economics: Theory and Policy. Edinburgh: Pearson Education Limited.
